Today, market participants will turn their attention to the US, where the House of Representatives is expected to vote on whether to repeal and replace the Affordable Care Act (Obamacare) with President Trump’s new alternative, The American Healthcare Act (Trumpcare). A few weeks ago Trump pledged to deliver a "phenomenal" tax reform plan, but only after he took care of the health care issue. As a result, we think that this vote will be closely watched by investors. If the bill is voted down, markets could begin to speculate that tax reform is likely to take much longer to be introduced and implemented. This could also heighten doubts as to whether the new administration can deliver on its fiscal promises altogether, thereby raising uncertainty around the subject and leading to further downside correction in the assets that have priced in the "Trump effect", such as the dollar and US equities. Escalating political uncertainty could also benefit safe havens, like JPY and gold.
USD/JPY tumbled yesterday, breaking below 111.60 (R1), the lower bound of the range that contained the price action since the 11th of January. The rate hit support at 110.70 (S1) and then rebounded to challenge the key hurdle of 111.60 (R1) as a resistance. A rejection of the plan today is likely to encourage sellers to take advantage of that resistance zone and perhaps aim for another test near 110.70 (S1). If they prove strong enough to overcome that support, then we may experience extensions towards the psychological round figure of 110.00 (S2).
On the other hand, if the House votes for the bill, we could see a relief bounce in USD and US stocks as the risk of extended tax reform delays diminishes and as market participants become more confident that Trump can implement his overall agenda. In this case, USD/JPY could emerge back above 111.60 (R1) and signal its return back within the range it had been trading since early January.
Having said that though, even if it passes the House today, it has to be approved by the Senate, perhaps as early as next week. Therefore, although a House pass could spread some market euphoria, there is still a lot to be done before we have a concrete outcome.
RBNZ remains on hold, keeps the door open for further easing
The RBNZ kept its Official Cash Rate unchanged yesterday, as was widely anticipated. The meeting statement did not contain any major surprises and as such, there was a relatively limited reaction in NZD. The officials noted that the trade-weighted exchange rate has fallen 4% since February and that although this is encouraging, further depreciation is needed to achieve more balanced growth. With regards to inflation, the Bank noted that it is expected to return to the midpoint of the target band over the medium-term, an upgrade from the previous statement where it expected this to happen "gradually". Last but not least, the officials kept the door open for further easing by reiterating that numerous uncertainties persist, particularly in the global outlook, and that policy may need to adjust accordingly.
NZD/USD traded somewhat higher ahead of the decision to find once again resistance near the 0.7075 (R1) obstacle and the downtrend line taken from the peak of the 7th of February. In the aftermath of the meeting, the rate slid again, but the slide remained limited above the 0.7015 (S1) support line. We hold the view that the short-term path is negative, but we would like to see a clear break below 0.7015 (S1) before we assume that the recovery started on the 14th of March is over and that we are back in the direction of the trend. Such a break is possible to initially aim for the next support of 0.6970 (S2).
As for the bigger picture, the outlook of the pair remains cautiously negative as well, in our view. The RBNZ has been very vocal about wanting a weaker Kiwi, and has even threatened to intervene in the FX market in previous meetings. Combined with the fact that it has kept the door for further easing open and that domestic economic data are mixed, the currency could stay on the back foot for a while. Nevertheless, in order to get more confident on larger declines, we would like to see a decisive close below the strong support of 0.6880.
As for the rest of today’s highlights
During the European day, the only major indicator we get is UK retail sales for February. Both the headline and the core rates are expected to have risen following two consecutive months of declines. Coming on top of the latest acceleration in the nation’s CPIs, rebounding retail sales could fuel further market expectations over a reduction in BoE stimulus and thereby, bring GBP under renewed buying interest.
From Eurozone, we get the preliminary consumer confidence index for February.
From the US, we get new home sales for February and initial jobless claims for the week ended on the 17th of March. New home sales are forecast to have risen for the second consecutive month, while initial jobless claims are expected to have ticked down, something that would drag the 4-week moving average somewhat lower too.
As for the speakers, today’s agenda includes only Fed Chair Janet Yellen. Even though she is one of the most important speakers in the financial world, we do not expect her to deliver any new market moving information. It has only been a week since we heard her views at the press conference of the latest FOMC meeting and there have been no major changes in the US economy’s outlook since then.
USD/JPY
Support: 110.70 (S1), 110.00 (S2), 108.80 (S3)
Resistance: 111.60 (R1), 111.90 (R2), 112.40 (R3)
NZD/USD
Support: 0.7015 (S1), 0.6970 (S2), 0.6945 (S3)
Resistance: 0.7075 (R1), 0.7110 (R2), 0.7170 (R3)
